On December 29, 2011, in California Redevelopment Association v. Matosantos, the California Supreme Court (“Court”) upheld the constitutionality of AB 1X 26, a statute ending redevelopment agencies in the state. In the same decision, the Court rejected AB 1X 27, which would have allowed a carve out for redevelopment agencies to continue to exist if certain requirements were met. This decision will have significant ramifications on existing development projects involving redevelopment agencies in the state.

The statute that was upheld, AB 1X 26, adds two major parts to Health and Safety Code, Division 24. Part 1.8 is what the Court dubbed the “freeze” component and bars redevelopment agencies from incurring new or expanding existing monetary or legal obligations. Part 1.85, the “dissolution” component, terminates the existence of redevelopment agencies in the state.

From the outset, the statute and the Matosantos decision have left questions unanswered and have caused general confusion. This article highlights some of these issues, as well as some key dates and deadlines under the statute as modified by the Court decision.

Activities of Redevelopment Agencies Have Been Halted Since June 2011

The Matosantos decision explains how deadlines for the dissolution component arising before May 1, 2012, generally have been delayed by four months. However, the decision itself does not make clear the timing of the freeze component. Though the dissolution component of AB 1X 26 was “stayed” (temporarily suspended) and affected by the Matosantos litigation, the freeze component went into effect in June 2011 and has been unaffected by the litigation. The Court issued a stay order on August 11, 2011. As part of that order, the Court temporarily suspended AB 1X 26, except for Part 1.8. Thus, the freeze component was not subject to the stay, while the rest of AB 1X 26, including the dissolution component, was temporarily suspended. All of the provisions of Part 1.8 took effect and were operative on the effective date of AB 1X 26.

As a budget related bill, AB 1X 26 took effect immediately after the governor signed it on June 28, 2011. While the dissolution section of the bill was temporarily halted while the Court reviewed it, the provisions freezing redevelopment powers took effect immediately upon the governor’s signature. Consequently, the freeze component of AB 1X 26 has been in place since June 2011.

The dissolution component of AB 1X 26 involves the creation of “successor agencies” (usually the underlying city or county that created the redevelopment agency) to replace redevelopment agencies during the dissolution process. Cities and counties across the state must determine whether to serve as successor agencies by January 13, 2012; if they choose not to, the Governor will appoint three members from the relevant county to serve on the governing board of a “designated local authority” which will act as a successor agency.

Further, each successor agency must have a seven-member oversight board that will approve and direct certain actions of the successor agency. Two members of the oversight board will be appointed by the county board of supervisors, one member representing the employees of the former redevelopment agency will be appointed by the mayor or the chair of the board of supervisors, and one member will be appointed by each of the following: mayor, largest special district by property tax share within the territorial jurisdiction of the former redevelopment agency, county superintendent of education, Chancellor of the California Community Colleges. As modified by the Court, the names of members of the oversight boards must be submitted to the Department of Finance by May 1, 2012.

Successor Agencies and Oversight Boards Are to Dispose of Assets and Properties “Expeditiously”

It is unclear how soon redevelopment agency assets and property must be liquidated. One of the responsibilities of each oversight board is to direct the successor agency to “[d]ispose of all assets and properties of the former redevelopment agency that were funded by tax increment revenues of the dissolved redevelopment agency.” (Assets that were constructed and used for a “governmental purpose” may alternatively be transferred to an appropriate government entity.) The legislation and the decision do not provide a timeline or deadlines for disposing the assets and properties; rather, AB 1X 26 vaguely states that the disposal is to be done “expeditiously and in a manner aimed at maximizing value.” It is unclear what timeframe would be appropriately “expeditious.”

Additional questions underlie how the value-maximizing requirement will interplay with the expeditious requirement. For instance, redevelopment agencies currently control significant amounts of land throughout the state. If these assets enter the market simultaneously, simple economics dictate that prices might be negatively affected. Consequently, if a successor agency’s expeditious disposal of redevelopment agency assets and property coincides with the disposal of other redevelopment agencies’ assets and property, such disposal would likely not be accomplished “in a manner aimed at maximizing value.”

AB 1X 26 and Matosantos also fail to explain the legal means by which redevelopment agency assets and properties can be disposed of under California law. It is unclear whether local laws of the city or county, redevelopment agency law or other state laws should govern the disposal process.

Further, all of the requirements of successor agencies and oversight boards, including the disposal process, will result in considerable administrative costs. Again, AB 1X 26 and Matosantos do not specify the means for paying these costs. Whether the successor agencies can use revenue from the asset sales to cover these costs or whether the successor agencies will have to absorb these costs through other revenue sources may lead to significant battles between state and local entities.

Underlying Lack of Guidance Regarding Non-Payment Obligations

As a constitutional matter, AB 1X 26 cannot impair existing contracts. The statute itself cursorily states that redevelopment agencies cannot impair “enforceable obligations” of existing contracts. However, AB 1X 26 tends to only focus on explaining how payment-related obligations must be honored; it is unclear how redevelopment agencies must address non-payment obligations, especially when such obligations are contrary to other mandates of AB 1X 26.

Redevelopment projects throughout the state are currently in varying stages of planning, construction and development. Many valid agreements entered into before the freeze contain conditions precedent that must be satisfied before subsequent stages of development can be triggered. AB 1X 26 does not contemplate how to handle conditions precedent that redevelopment agencies are in the middle of performing. For instance, it is common for a redevelopment agency to contractually agree to sell or otherwise transfer property to a developer at a future date as a step to securing financing. On one hand, under AB 1X 26 (and the California Constitution), contractual obligations such as this must not be impaired; on the other hand, AB 1X 26 requires successor agencies to dispose of redevelopment agency assets expeditiously.

AB 1X 26 does state that oversight boards can negotiate settlements for breaching contracts. However, the legislation offers no guidance regarding how such settlements are to be negotiated. This is particularly troublesome for non-payment contractual obligations, where calculating damages may be difficult. Further, AB 1X 26 does not specify which fund(s) may be used to pay damages.

Selected Key Dates and Deadlines

Though the freeze component has been unaffected by litigation, the dissolution component—Part 1.85—was temporarily suspended during litigation. Generally, any deadlines arising before May 1, 2012, have been delayed by four months under Matosantos. Some key dates and deadlines include:

January 13, 2012: city or county that created redevelopment agency to determine whether to serve as successor agency

April 15, 2012: successor agency’s first Recognized Obligation Payment Schedule due to State Controller and Department of Finance

May 1, 2012: names of members of oversight board to be reported to Department of Finance

July 1, 2012: county auditor-controller completes audit of each former redevelopment agency in the county

January 1, 2013: California Law Revision Commission to draft a cleanup bill for consideration by the Legislature

July 1, 2016: oversight boards within each county consolidated to single oversight board

The issues highlighted in this article are examples of the confusion and challenges resulting from AB 1X 26 and the Matosantos case. For more information regarding potential problems associated with the dissolution of California redevelopment agencies, please contact Ursula Hyman, Cindy Starrett, James Arnone, or Daniel Van Fleet of Latham & Watkins at +1 213-891-1234.

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